Venable SEC Update O C T O B E R 2 0 0 6 DEADLINES FOR COMPLIANCE - PDF document

Venable SEC Update O C T O B E R 2 0 0 6 DEADLINES FOR COMPLIANCE WITH NEW DISCLOSURE RULES ON EXECUTIVE AND DIRECTOR COMPENSATION RAPIDLY APPROACHING Begin Preparing for 10-K and Proxy Statement Disclosure Now New Form 8-K Rules in Effect November 7, 2006 The new rules recently adopted by the Securities and Exchange Commission ("SEC") governing the disclosure of executive and director compensation for publicly traded companies and other issuers required to register and file reports with the SEC ("New Rules") present some of the most significant and far reaching changes in the SEC's disclosure regime in many years and the time for complying with these New Rules is rapidly approaching. Companies generally must comply with the New Rules for SEC filings for fiscal years ending on or after December 15, 2006. Additionally, the changes to Form 8-K contained in the New Rules apply to triggering events occurring on or after November 7, 2006. This SEC Update lists certain action items that companies subject to the New Rules need to be taking immediately to ensure timely compliance. Before discussing these actions, however, we first want to provide a brief summary of the New Rule's most important features. Summary of the New Rules The New Rules (i) change the definition of the "named executive officers" ("NEOs") whose compensation is required to be disclosed, (ii) add a new Compensation Discussion and Analysis section, and (iii) significantly enhance the Summary Compensation Table and add more supplemental tables in an attempt to capture a more comprehensive and representative picture of executive and director compensation in annual proxy statements and other filings. Covered Individuals. Under existing rules, reporting companies must disclose compensation received by NEOs. The New Rules modify the definition of NEOs to primarily include the individuals serving as principal executive officer ("PEO") and principal financial officer ("PFO"), regardless of actual compensation, during the last fiscal year, and the three most highly compensated executive officers other than the PEO and PFO who were serving at the end of the last fiscal year and whose total compensation was $100,000 or more. Compensation Discussion and Analysis (the “CD&A"). The CD&A must discuss the material factors underlying a company's compensation policies and decisions and is intended to come before, and provide context for, the compensation tables and related narrative disclosures. In providing this context, the CD&A must address six general topics: (i) the company's compensation program objectives; (ii) what such program is designed to reward; (iii) each element of compensation; (iv) why each element of compensation is chosen; (v) the manner in which the company determines the amount (and if applicable, the formula) for each compensation element; and (vi) the manner in which each compensation element and the company's decisions regarding that element fit into the company's overall compensation objectives and affect decisions regarding other compensation elements. The CD&A must be written in "plain English" tailored to the company's individual circumstances. In addition, because the CD&A must be "filed," it will be subject to the CEO/CFO certifications filed with the Form 10-K. V A L U E A D D E D , V A L U E S D R I V E N. S M

S E C U P D A T E O C T O B E R 2 0 0 6 2 In an acknowledgement on the recent stock option back-dating controversy, the CD&A should contain a separate section discussing the company's option granting practices in the event the company has coordinated or expects to coordinate the timing of granting options with the release of material nonpublic information. A modified Compensation Committee Report must also be included, stating whether the compensation committee reviewed the CD&A with management, and if so, whether it recommended that the CD&A should be included in the company's Form 10-K and proxy statement. Unlike the CD&A, the Compensation Committee Report will be treated as "furnished." Compensation Tables. The New Rules provide that following the CD&A, a detailed disclosure, organized in the three broad categories listed below, is required in tabular format with supporting narrative discussing any material factors necessary to understanding the tables: • Compensation with Respect to the Last Fiscal Year Summary Compensation Table (the “SCT”). This table must identify all NEO compensation using dollar figures and now must include a "total compensation" column consisting of the sum of the other columns. The "all other compensation" column must consist of an aggregate dollar figure for all compensation not reported in any other column and requires detailed footnote disclosures of, among other items, perquisites and tax reimbursement gross-ups. Perquisites with an aggregate value of $10,000 or more must be described, and, if valued at the greater of $25,000 or 10% of total perquisites for that individual, quantified. Any single reported item, other than a perquisite or personal benefit, exceeding $10,000 must be identified and quantified. Finally, because the SCT will be phased in over the next three years, prior year information to which the current rules apply will not need to be included. Grants of Plan-Based Awards Table. This table must list for each NEO the grant date of the listed awards, estimated future payouts under both non-equity and equity incentive awards, all other stock and option awards, and the exercise or base price of option awards. • Equity and Equity-Related holdings ( Outstanding Equity Awards Table and Options Exercised and Stock Vested Table ) These tables must include, respectively, outstanding stock and option awards held by NEOs at fiscal year end, and amounts realized by each NEO, in the last fiscal year, on equity awards. • Retirement and other post-employment compensation ( Pension Benefits Table, Nonqualified Deferred Compensation Table and Potential Termination and Change-in-Control Narrative ) The two tables must include among other items, the actuarial present value of each NEO's accumulated benefit under each pension plan, and all executive and employer contributions (plus earnings for the year), withdrawals/distributions and year-end balance for each nonqualified deferred compensation plan. The Potential Termination and Change in Control Payment Narrative must describe and quantify any arrangement that provides for payments following or in connection with an NEO's termination of employment or change in responsibilities, or the company's change in control. Director Compensation. The current narrative disclosure requirement is being replaced by a comprehensive table similar to the SCT, but for the most recent fiscal year only. Guidance on Perquisite Disclosure. The new rules provide interpretive guidance stating that an item of compensation is a perquisite if it is not "integrally and directly related to the performance of the executive's duties," and also "confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some V A L U E A D D E D , V A L U E S D R I V E N. S M